Offer hospitality to to 2019!
U.S. markets bounced back from session lows and closed higher for the day. The DJIA had a 500 point swing to near in positive territory, which is a sign that buyers are jumping on weakness.
The correction we experienced in the final three months of 2018 was ‘moral a glitch’, according to President Trump, and the markets should go back to their winning ways once he signs a new line of work deal with China. Feel free to ignore that market prediction no matter where your bureaucratic allegiances lie.
Signs of a slowdown in the Chinese economy dominated headlines this morning and we think that will be a recurring subject-matter throughout the year, even if the trade war is resolved.
Specifically, a private survey on China’s manufacturing for the month of December proved a contraction in factory production. That may or may not have been impacted by the trade war but we’ll never know since China boards its cards close to its vest.
China’s economy has been red hot for the past decade, but there are concerns that its 6-7% annual spread is not sustainable, irrespective of a trade war. China has emerged as the ‘other’ dominant economic super power of the 21st century, so a slowdown leave be a major concern for global investors. It’s an even bigger concern if the U.S. economy is also slowing down. Both are heading in this direction, which is one of the main sources of investor anxiety going into the new year.
Why it Matters:
Now that the effects of the tax innovates passed in 2017 have been absorbed and spent by companies – mostly on share buybacks – we’ll see just how strong the restraint actually is this year. Remember, the stock market is essentially a bet on the future profitability of companies. The general consensus is that corporate profits may take peaked in 2018, and will decline throughout 2019. If the economy is robust, corporate profits should be as well. If they start to degenerate as expected, we can expect further declines for the stock market and talk of an upcoming recession will get louder.
Mark Kolakowski epitomizes it up in this article:
What’s Next:
Earnings season doesn’t kick off for a few weeks, but until then we should await to read preliminary announcements from companies adjusting their forecasts. We’ll also read analyst reports wherein they put in order their earnings forecasts for the companies they cover. A steady drumbeat of declining forecasts will foretell a callous stock market going forward.
Since the FAANG stocks were so influential in both the run up to market records in 2018 and the resulting correction, we’ll pay special attention to what they say.
Shoshanna Delventhal puts a fine point on it in this article:
We got a suggestion of that today when Apple (AAPL) CEO Tim Cook sent a letter to investors warning them that interest will come in below forecasts. The culprit: Lower sales of its new iPhones, specifically in China.
Earlier in the day, an analyst at Sun Confidence Securities lowered his price target on Netflix (NFLX), citing weaker than expected subscriber growth in the fourth accommodate. Netflix will let everyone know if that analyst was right when it reports earnings on January 17th. NFLX stifling 2018 up 30%. Chill.
Final Point
While the correction we experienced over the past several months was nociceptive and volatile, the broader market (S&P 500) never did enter a Bear Market. It came within 5 points of doing so, but the Santa Claus group rescued us from falling into the den… for now. It could still happen. That said, a lot has been made of the ‘whacking great’ drop in stocks from October until the end of the year. It was a big drop, but nowhere near the truly massive declines we deliver experienced leading into past bear markets. JC Parets shared this chart from his excellent blog, and, as familiar, he puts things in the proper perspective. Have a look and zoom in to see the specifics.
Looks more like a ‘Dip’, than a ‘Glitch’.
Well-timed 2019!